The ability of companies to bankroll their capital expenditure has risen more than threefold in the past decade after a long spell of deleveraging and profit growth, a CRISIL analysis shows. Similarly, a significant reduction in bad loans and timely recapitalisation have meant that the banking sector is very well-placed to lend. Together with rising credit supply from alternative channels and financial innovation, the growth finance available for both the “great Indian infrastructure build-out” and corporate capital expenditure is arguably the largest in memory, including as a percentage of nominal GDP.
As India Inc delivered, cash accruals rose, capex requirements fell and working capital cycles improved. An analysis of companies rated by CRISIL (excluding financial sector entities) shows that the median gearing (adjusted debt to adjusted net-worth) was at a decadal low of around 0.45 times as on March 31 — a fabulous improvement from around 1 time as on March 31, 2015. (The total rated outstanding companies as of March 2024 were around 7,000, out of which the calculation was done for a subset of around 4,000 companies where consistent data was available for at least three years).
Assuming this increases to 0.75 times (this assumption is half of the typical peak manufacturing gearing of 1.5x, the leverage potential of each company will vary depending on business requirements and risk appetite), we still find as many as 2,222 companies having material headroom to take on new debt.
The study presupposed half of the available surplus cash can contribute to capex — as was done for the same set of companies for fiscal 2015. Given the low median gearing and surplus cash, the ability of India Inc to undertake capex now is three times more than in fiscal 2015. Put another way, capex ability was 3.8 per cent of the nominal GDP a decade back, compared to 5.2 per cent now. On their part, companies will closely watch interest rates, global uncertainties, excess global capacity, and the uneven recovery before going for large-scale spending.
The banking sector numbers — March 31, 2024, compared with March 31, 2015 — are extremely encouraging, too. The absolute net worth of the sector has more than doubled to around Rs 24 lakh crore from Rs 9 lakh crore. Net non-performing assets (net NPAs) have plunged to an all-time low of around 0.6 per cent from a peak of 6 per cent, while gross NPAs have crunched to 2.8 per cent last fiscal-end from the peak of 11.2 per cent as on March 31, 2018.
Both net and gross NPAs were relatively low at 2.5 per cent and 4.6 per cent, respectively, as on March 31, 2015, but peaked by March 31, 2018, while improving thereafter. The provisioning coverage ratio has risen to an all-time high of 76.4 per cent from 41.7 per cent as on March 31, 2015, materially limiting the incremental impact on profitability from potential losses on NPAs. Additionally, banks have resorted to write-offs to clean up balance sheets. Gross write-offs (excluding recovery at a later stage from such accounts) between fiscals 2015 and 2024 were over Rs 15 lakh crore, a large proportion of which happened from 2018 onwards.
Capital infusion by the government into public-sector banks and capital raised by private-sector banks have enabled them to write off NPAs based on the assessment of recoverability, build a healthy provisioning coverage ratio for existing NPA stock and yet maintain strong capital buffers. The public-sector banks have done particularly well. At 15.5 per cent, their capital adequacy ratio is the best in two decades.
India’s credit market has seen the advent of new avenues of fundraising, such as infrastructure investment trusts (InvITs), real estate investment trusts (REITs), restricted groups (RGs), and sustainability-linked and green bonds driven by environmental, social and governance persuasions. It is pertinent to note here that India’s infrastructure capex has increased significantly since the past six fiscals. The outlay budgeted for this fiscal is Rs 11.1 lakh crore.
Traditionally, infrastructure projects were funded either by the government or by large corporations. There was almost no direct investment from the public or foreign investors. InvITs have funnelled both equity and debt from public and foreign investors into infrastructure assets and allowed infrastructure developers to monetise revenue-generating assets, thereby freeing up capital for new projects. When revenue-generating assets move to InvITs, many benefits are engendered — diversification, lower leverage, well-defined cash flows and regulatory oversight. That increases investor confidence in infrastructure assets housed in InvITs.
Since their introduction in 2017, there have been over 19 InvITs with assets under management (AUM) of Rs 4.9 lakh crore, half of which is funded by debt. REITs are similar in structure to InvITs, but specific to real estate assets. Four REITs today have AUM of Rs 1.4 lakh crore, a third of which is funded by debt. Because of the healthy credit profiles of InvITs and REITs, corporate bond market participants are also confident of participating in India’s growth story.
Of late, RGs have emerged as another innovation, with similar benefits of diversification, debt limitation and ring-fencing of cash flows. Today, there are 13 RGs rated by CRISIL Ratings, of which 11 are for renewables with rated debt of Rs 14,000 crore, where it is becoming popular. Such structures are expected to gain further traction.
Additionally, sustainability-linked and green bonds are gaining currency given the emphasis on mitigating climate risk. Green bond issuances have begun to fund renewable energy projects. These are favoured by overseas investors and can gather momentum with India now being included in the JP Morgan Emerging Markets Bond Index and with more such inclusions underway. However, the domestic corporate bond market needs to deepen more to become a substantial flank of funding. The enablement of this platform cannot be overstated.
Today, infrastructure issuances are 15 per cent of the annual corporate-bond issuances by volume. Some structural improvements via a policy pivot can make these amenable to patient-capital investors — insurers and pension funds. This can be in the form of allowing investments down the credit curve — below the AA rating, increasing exposure limits to the infrastructure sector, and adoption of expected loss ratings. And by improving the capacity and risk appetite of the corporate bond market, take-out financing of operational infrastructure projects can be facilitated. This can, in turn, create additional credit capacity to fund capex in new emerging sectors such as green energy.
The growth-finance wherewithal is at its decadal best. Regulatory facilitation will be the key to its full unlocking. Relentless execution, strong credit discipline and income spurs for demand growth will be just as crucial, even as the focus on sustainability is kept razor-sharp. That will ensure an enduring ascent for India.
The writer is managing director and CEO, CRISIL Limited
